Fed Begins Adding Reserves to System With Repurchase Agreements

The Federal Reserve Bank of New York said it’s temporarily adding reserves to the banking system with “small-value” repurchase agreements as part of a program to test the central bank’s operational readiness.

The transactions, part of a series of open-market operations began in 2009, don’t represent any change in monetary policy, according to a statement yesterday on the New York Fed’s website. All eligible collateral will be able to be used in the transactions, which will be conducted with the central bank’s 21 primary dealers.

In June 2012, the Federal Open Market Committee authorized the New York Fed to undertake repos and outright purchases and sales of securities, in addition to reverse repos, for testing. The Fed did its first round of repo testing in August 2012.

Prior to that transaction, the Fed hadn’t conducted a repo since Dec. 30, 2008. Since then, the New York Fed has added six primary dealers, the firms that act as counterparties to the central bank.

In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.

The Fed has historically used repos and reverse repos to help maintain the proper level of money in the banking system to keep overnight interest rates close to the central bank’s target. The Fed has held its target rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008.

In a tri-party arrangement, a third party functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. (BK) are the only banks that serve in a trade-clearing capacity in the tri- party repo market.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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